To accomplish important personal and financial goals such as buying a home, starting a business, traveling, and retiring someday, most folks need saving money. Some exceptions do exist, such as those fortunate people who have trust funds or inherit significant enough sums that they don’t need to save money from their work earnings. But the vast majority of people must save in order to accomplish their goals.
You can’t effectively save up for a long-term goal if you don’t know what your savings rate is. When I worked as a financial counselor and taught adult education money-management courses, I was struck by how few people knew the rate at which they were saving money. Most people can tell you what they earned from their work over the past year, but few folks really know what portion of their employment income they were able to save. That’s because to have an accurate idea of this percentage or savings rate, you really need to do some analysis and calculations.
The math isn’t that complicated, but it does require some time and effort, especially if you haven’t been tracking your spending or net worth over the past year. In the following sections, I explain a couple of different ways to calculate your savings rate over the past year.
Netting your income and spending
The first way to determine your savings rate is to tally your employment income and expenses over the past year. By subtracting your total expenses, including taxes, from the past year from your employment income, you can arrive at net savings.
The employment income part of the equation is simple for most folks — it’s simply the total amount of your paychecks from work. But unless you systematically track your spending, that piece of the puzzle is a lot more work to figure.
Tags: savings, savings rate, saving
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